527s Under Scrutiny From States

State and federal regulators are cracking down on nonprofit political groups, so-called 527s, suspected of circumventing state campaign finance laws.

According to the Center for Public Integrity , a nonprofit, nonpartisan political watchdog group, the Republican State Leadership Committee (RSLC), which backs state-level GOP candidates, is drawing scrutiny for its role in the 2004 Pennsylvania attorney general's race. The RSLC also has been fined $20,000 in Louisiana and $10,000 in North Carolina, according to the Center.

In a new report , it said Minnesota regulators had levied a record $400,000 penalty against a Democratic political organization that failed to file proper state disclosure forms. And an Arizona nonprofit agreed to disband this year after a nearly year-long battle with state campaign finance officials who fined the group $5,000, the Center said.

It said an audit by the Internal Revenue Service estimates that more than 30 percent of such groups are improperly registered as nonprofit organizations. The IRS is planning to investigate all similar state-level political groups, which are exempt from federal limits on campaign contributions and spending, and make sure they are following state limits.

"People are registering these groups to be outside the [state campaign finance] system," said Leah Rush, the Center's director of state projects. The Center is funded partly by The Pew Charitable Trusts, the same philanthropy that funds Stateline.org.

The increased scrutiny comes three years after a federal law sponsored by U.S. Sens. John McCain (R-Ariz.) and Russell Feingold (D-Wis.) prohibited parties and political action committees from raising "soft money" -- unlimited cash raised and supposedly spent independently of the parties or candidates for "voter education" or "issue advocacy."

But a new political animal evolved to skirt those limits: The 527, named for a section of the federal tax code, can receive contributions in any amount from any source and spend it on anything except directly advocating the election or defeat of a specific candidate.

527s have become major political players at both the state and national level, raising approximately $535 million for the 2004 elections, compared to $268 million in 2002, according to CPI, which tracks campaign finance and lobbying dollars.

Some 527s, such as Swift Boat Veterans for Truth and MoveOn.org grabbed headlines with their efforts to sway the 2004 presidential campaign.

The RSLC, the Democratic Legislative Campaign Committee and the Republican and Democratic governor's associations are among the largest 527s, according to the CPI. The four raised more than 35 percent of the $51.9 million contributed this year to the nearly 600 existing 527s.

Campaign finance watchdogs are concerned that 527s are circumventing state election laws by raising money from sources and in amounts that would be prohibited by some state laws.

"Essentially, all the laws that govern 527s are at the federal level," said Brian McDonald a spokesman for the Pennsylvania Department of State .

Pennsylvania regulators are looking into a $480,000 contribution from the RSLC to Attorney General Tom Corbett's 2004 campaign. After Corbett won, the RSLC was forced by state officials to disclose that all but $30,000 of the state's largest-ever single campaign contribution came from the chairman of the Chesapeake Energy Corporation . Election officials were disturbed that the RSLC initially refused to reveal the source of the money, and want to ensure that the donation did not violate a Keystone State ban on corporate campaign contributions, said Kevin Bogardus, a CPI researcher.

The Louisiana State Board of Ethics penalized the RSLC for failing to disclose the source of funds used to pay for advertisements aimed at Charles C. Foti Jr., a Democrat who won the 2003 race for attorney general. And the North Carolina State Board of Elections ruled that the RSLC had violated the $4,000 limit on party contributions, with a $100,000 gift to the state GOP.

In Minnesota, the organization 21st Century Democrats failed to register with the state's Campaign Finance and Public Disclosure Board and was slapped with the state's largest fine for a campaign finance violation.

The Citizen's Clean Elections Commission in Arizona also ruled that a 527, formed to promote moderate Republican candidates, had failed to register the proper disclosures with the state. The group, Mainstream Arizona, eventually agreed to dissolve and pay a fine.

An August report from the Internal Revenue Service found that there was potential for widespread abuse of the 527 provisions because of a lack of coordination between state and federal regulators. The federal tax agency is planning to review state campaign finance statutes and identify 527s that are not complying with those rules.

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